Cite As:
Aristotle G. Mirzaian, Y2K . . . Who Cares? We Have Bigger
Problems: Choice of Law in Electronic Contracts, 6 RICH. J.L. & TECH.
20 (Winter 1999-2000) <http://www.richmond.edu/jolt/v6i4/article3.html>.
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A. Story of a Simple Net Transaction
B. Overview of the Article
II. ELECTRONIC CONTRACTING AND THE INTERNET1. The Internet: What is it and How Does it Work?
a. What is Electronic Contracting
2. Electronic Contract Formation
e. Singapore Model: Electronic Transaction Act of 1998
III. SUBJECT MATTER JURISDICTION: A MATTER OF FEDERAL LAWA. Commerce Clause: Authority of Congress to Regulate Interstate Commerce
B. Defining Commerce: Tangible v. Intangible Goods
C. Precluding State Regulation of Electronic Commerce
D. Addressing the Choice of Law Issue
IV. PERSONAL JURISDICTION: THE PROBLEM OF PRESENCEA. The Evolution of Personal Jurisdiction
B. Other Bases of Jurisdiction
4. Universality Principle and Protective Principle
C. Personal Jurisdiction and the Internet
1. Judicial Opinions on the Internet Jurisdiction
2. Non-Judicial Opinions on Internet Jurisdiction
V. TRADITIONAL CONFLICTS OF LAW ANALYSIS IN CONTRACTSA. Restatement (First) Conflict of Laws
B. Restatement (Second) Conflict of Laws
F. Contractual Choice of Law Clauses
G. Contemporary Trends in Choice of Law Doctrines
VI. CONSTITUTIONAL LIMITATIONS ON CHOICE OF LAW DOCTRINESA. Privileges and Immunities Clause
B. Full Faith and Credit Clause
VII. FOUNDATIONS OF LAW FOR CYBER-CONFLICTSA. Lex Mercatoria: Customary Law
B. Multilateral Choice of Law Treaty: A Uniform Approach
VIII. CONCLUSION
A.
Story of a Simple Net Transaction
"Every day it becomes more certain that the Internet will take its place alongside the other great transformational technologies that first challenged, and then fundamentally changed, the way things are done in the world."[1]
{1}According to Gary R. Bachula, Acting Under Secretary for Technology for the U.S. Commerce Department, the number of Internet users and webpages are doubling every 100 days.[2] By the beginning of 1999, it was estimated that the Internet was being used by more than 200 million people around the world.[3] This rapid growth becomes far more astonishing when recognizing that, in 1994, the total number of Internet users was only three million people.[4] This statistical increase far exceeds the growth rate of other past technological innovations, such as radio, television and cable.[5] Statistics show that this Internet and information technology boom is closely tied to the growth of the U.S. economy as a whole.[6] Analysts cited by the Department of Commerce's National Telecommunications and Information Administration predict that, in 2000, there will be over a trillion dollars spent on equipment and services alone in the global telecom industry.[7] E-business or e-commerce, which is a segment of the industry, is predicted to grow twice as fast as the industry as a whole, into a $600 billion industry in its own right by 2002.[8] Among businesses alone, it is anticipated that e-commerce will account for over $300 billion in the early part of this decade.[9]
{2}This potential market for emerging Internet-based businesses can create as many conundrums as opportunities in this new, worldwide marketplace. Imagine the following scenario: upon learning of the booming economic trend in e-commerce, Scott, a computer programmer who lives in San Jose, California, designs a virus detection and removal program called "Vir-All." Vir-All is specifically designed to detect and to remove Internet-based computer viruses. In order to cut down on costs, Vir-All is made available only on the Internet through a website; thus, it is not sold in any stores. The virus software sells for a whopping $500, but is guaranteed to detect and to eradicate any and all viruses, both current and future.
{3}The Vir-All website has several innovative features, including a fully-automated ordering system. The automation feature works as follows: (1) customer purchases Vir-All over the Internet using an electronic order form (containing no choice of law provision) and pays for it with a credit card; (3) the order is then routed to a central processor where the customer's credit card is processed - unbeknownst to Scott, this processor is located in Ohio; (4) upon approval, the customer is allowed to download Vir-All directly onto their computer. Scott is not notified of each individual purchase, nor is he aware of the routing of the order.
{4}The site is an overnight success. Scott receives orders from across the United States and from far- reaching corners of the globe. One day, Scott receives a letter from a customer who purchased Vir-All. The customer lives in New York; however, records indicate that he downloaded Vir-All onto his laptop computer while visiting an aunt in London. The letter contains a summons to appear in an action filed in New York for breach of contract. In this case, Scott is being asked to defend a suit in New York. Scott has never been physically present in New York. Moreover, he has never had any contact with anyone in New York.
{5}Therefore, should Scott be subject to suit in New York? If the suit were filed in California, the California court would undoubtedly have personal jurisdiction over Scott, solely based on the fact that he is a resident of California. Moreover, California's substantive law would likely be applied to the suit. However, the question here is whether a court in New York should entertain a suit, and, if so, whether it should apply New York's substantive law or the substantive law of another jurisdiction.
{6}The Vir-All scenario provides an example of an electronic contract that is formed, paid for, and performed in cyberspace; thus, rendering traditional choice of law doctrines inapplicable. Scott's situation involved a simple Internet transaction that turned out to be not so simple. Due to varying legal doctrines among states and countries, net users may find themselves subject to lawsuits and the laws of far away places. In short, nothing about electronic commerce is simplistic.
{7}The purpose of this article is to demonstrate how conventional choice of law doctrines are ill-adapted to resolving disputes arising out of electronic contracts. This is due, in large part, to the heavy reliance that contract law places on the notions of contracting, performance, and other similar factors. The conclusion of the article will combine the relevant portions of the analyses from each of the preceding sections, while providing an overview of how federal legislation will resolve the choice of law dilemma in electronic commerce by referencing the Vir-All example.
{8}This article is divided into
seven sections. Section II provides an overview of how the Internet
works, and provides statistical information about Internet users
with respect to electronic contracting, along with a synopsis
of what electronic contracting is, how it works, the issues surrounding
it, and several pieces of legislation drafted to address these
issues. Section III suggests the regulation of electronic commerce
is strictly a matter of federal law pursuant to the Commerce Clause.
This section also demonstrates that choice of law problems surrounding
electronic commerce are significantly reduced if Congress enacts
a federal law that effectively preempts the states from regulating
electronic commerce in any manner.Section IV traces the history
of personal jurisdiction to recent cases analyzing the constitutionality
of jurisdiction over defendants present in a forum via the Internet.
Section V discusses a variety of choice of law doctrines utilized
by courts across the nation. That section further explores several
alternative doctrines that may apply to conflict of laws with
respect to electronic contracts. Section VI briefly analyzes the
constitutionality of choice of law doctrines applied by courts
to resolve contractual disputes. Section VII of this article provides
suggestions onpromulgating an international choice of law system
by means of a treaty. This article concludes with Section VIII,
combining analyses from each of the preceding sections, and providing
an overview of how federal legislation resolves the electronic
commerce choice of law dilemma by referencing the Vir-All example.
II. ELECTRONIC CONTRACTING AND THE INTERNET.
1. The Internet: What Is It and How Does It Work?
{9}When someone goes on-line to search the Internet for information on the chief export of Angola, for example, they assume that their PC does most of the work.[10] The truth is that only a very small part of this on-line activity is actually handled by each individual PC.[11] Most the work is performed by huge computer systems in "the network."[12]
{10}The Internet is only one part of the "Information Superhighway" that is blazing the trail to the future.[13] This Information Superhighway includes many forms of electronic communication, ranging from telephone lines to satellites.[14] In its most basic form, the Internet is a series of interconnected computers that talk to each other via wires much like how we talk to each other on the telephone. These wires connect to something inside the computer called a "network interface" which is analogous to a person's mouth. Most people would recognize this as a modem or ethernet card. Usually, each modem has one or more IP addresses associated with it. Essentially, an IP address is a set of numbers that identify an address on the Internet, which then connects a particular computer to that address.[15] Much like we use a telephone number to contact a friend or loved one, computers use IP addresses to communicate with one another.
{11}When compared to traditional methods of communication, one of the many differences with the Internet is that there is often no identifiable sender of information. Moreover, it is only in very rare instances that the author of information published on the Internet directs his message to a particular recipient. That is to say, senders do not control the means by which the message is distributed. When messages are sent over the Internet, they are routed through a series of "protocols and packet switches."[16] This means that the data is broken up into small pieces and then systematically routed through a series of phone lines.[17] Each piece of data travels down a different path and is then put back together once it reaches its final destination, namely the receiving computer. This systemof routing makes it virtually impossible to determine the exact geographic path of a message.[18]
{12}Most people logging onto the Internet do so through an Internet service provider, like America Online or CompuServe.[19] When logged on, the computer connects to other computers all over the world.[20] When a customer fills out a contract or places a purchase order on the Internet, the information leaves the computer and travels to a nearby router.[21] Routers are analogous to postal substations that route mail to the appropriate area post office.[22]As such, when A sends a letter from California to B in New York, the letter does not leave California and magically appear in New York; instead, it is routed through a variety of substations on its path to its final destination in New York. The most pertinent fact is that A has no idea where the letter has been on its way to New York. The same is true with the Internet.
{13}According to current estimates, there are more than "thirteen million host computers in ninety countries linked by more than fifty-thousand connected computer networks."[23] Moreover, there are an estimated 650,000 websites currently in existence.[24]In terms of demographics, a majority of Internet users are trained professionals, between the ages of twenty-one and forty-five years-old, who have attained a college degree or higher.[25] Many of these individuals obtain access to the Internet either through school or work;[26] while, others rely on Internet service providers or commercial online services.[27]
{14}Notwithstanding how an individual logs onto the Internet, once online, he enjoys access to more information than contained in the New York City Public Library.[28] Yet, with very limited exception, the Internet is not regulated.[29]
{15}With "not just a billion connected people, but a trillion connected devices," failure to regulate this immense industry could prove disastrous.[30] Over time, computers have found a way into every facet of our lives. Everyday household items, like cars, roads, vending machines, and houses, contain computing devices.[31] The good old days of taking apart the engine of the 1972 family Volkswagen Beetle are no more. The Internet, or "the network computing revolution," will connect all of these components, so that one day we will be able to complete tasks our fathers could never imagine.[32]Now consider wielding this tremendous power without any rules or regulations whatsoever.
{16}The number of people conducting business and making purchases over the Internet is growing at an exponential rate. Approximately thirty-two percent of all individuals making Internet purchases spend between $100-500. Moreover, a startling 38% of all individuals making purchases on the Internet spend more than $500 per purchase.[33]Yet, on-line shopping is expected to soar.
{17}Given the large number of Internet transactions transpiring on a daily basis that amount to millions of dollars in revenue, disputes between customers and businesses are an inevitable consequence.[34]Thus, there is a clear need for a uniform system of choice of law.
1. What is Electronic Contracting?
{18}There are several types of electronic contracts. One type of electronic contracting is Electronic Data Interchange ("EDI").[35]In its most basic form, EDI simply transfers information between a series of networked computers.[36]However, EDI presupposes that trading partners have a prior working relationship.[37]For instance, a purchaser's computer senses that inventory levels are low, and as a result, initiates a sales transaction with the seller's computer using an agreed-upon purchase order.[38]Upon receiving the confirmation of a purchase order from the purchaser's computer, the vendor's computer directs the shipping department to send the requested goods to the purchaser, again using an agreed-upon form.[39]This series of transactions can be completed without any human interaction whatsoever.[40] Consequently, EDI is an attractive option for businesses because it cuts down on printing, personnel, and other costs ordinarily incurred.[41] Nonetheless, EDI is not the optimal choice for everyone.
{19}For instance, EDI will not work in the case of two trading partners who have no prior business interaction, such as customers visiting the Vir-All website. However, due to the nature of modern day computer networks, prior business relationships are not always necessary.[42] Whether dealing via networks, or face-to-face negotiations, many traditional contracting elements, such as authenticity, integrity, and non-repudiation, still exist.[43]In some cases, the purchaser may use an "intelligent agent," a program that executes a search on the Internet given the user's search parameters, to search out goods or services.[44]In other cases, a private individual browsing the Web, might discover a vendor's homepage on which the vendor offers goods and/or services.[45] In either situation, the purchaser may wish to contract with the seller, thus raising issues of contract enforceability.
{20}The nature of the open network is also the difficulty with electronic commerce.[46]In the case of a purchaser and seller who have no prior dealings, it is difficult to identify the parties to the contract.[47]Moreover, open networks also raise the issue of jurisdiction, which is dealt with in-depth later in this article.
2. Electronic Contract Formation
{21}One of the greatest concerns respecting electronic contracting is satisfying the Statute of Frauds. Returning to the Vir-All example, when a customer in New York or London completes the contract on Vir-All's website, the question arises whether there is a valid contract. If so, when and where was the contract formed? When a customer fills out an order form on a website, is it an offer or an acceptance? Most importantly, which forum has jurisdiction to enforce the contract, and which forum's substantive laws apply to resolve the claim?
{22}The Statute of Frauds in Article 2 of the U.C.C. was drafted in an attempt to encourage parties to reduce their agreements to writing, as well as to avert a party's ability to introduce perjured testimony at trial.[48]As a consequence, when a party reduces an agreement to writing, he is essentially precluded from denying that the contract was made.[49] Subject to a number of exceptions, Article 2 provides:
[A] contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker.[50]
{23}As previously mentioned, thirty-eight percent of all Internet purchases exceed $500, thus falling within the purview of the Statute of Frauds. When the Statute of Frauds is implicated, the primary issue regarding electronic contracts is the classification of electronic text, like e-mail and websites, that should be classified as writings.
{24}A "writing" is defined as a "printing, typewriting or any other intentional reduction to tangible form."[51]Additionally, the U.C.C. only provides that the writing be signed by the party against whom enforcement is sought.[52] However, the writing does not require communication or receipt by the other party.[53] "Signed" is defined as being "any symbol executed or adopted by a party with present intention to authenticate a writing."[54]
{25}Thus, the question is whether the electronic text of an email message or website constitutes a "signed writing" under U.C.C. Article 2. The "signature" requirement may be satisfied by confirmation, acknowledgment, or separate agreement. Otherwise, "the sufficiency of the electronic message depends on the manner in which one finds it stored or produced."[55]Professor Nimmer states that, "[i]n purely electronic transmissions that d[o] not begin or result in printed or other tangible manifestations adequate for the statute of frauds, the enforceable status of the transaction remains unclear."[56] For purposes of Article 2, one way to support an electronic message's status as a "writing" is to print and retain a hard copy for recording purposes. Another issue is determining whether the text of the website satisfies the Statute of Frauds. Once again, if a hard copy of the text is retained, the Statute of Frauds is satisfied.
{26}Thus, it appears that under Article 2, a court will construe an Internet transaction between a buyer and seller as a binding contract. Moreover, an on-line buyer is well advised to print out a "hard copy" of the relevant pages of the site for record keeping purposes in the event that a dispute arises over the contract. Finally, in light of the fact that thirty-eight percent of people surveyed spend more than $500 on Internet purchases a six month time period,[57] the Statute of Frauds is an important consideration.
{27}Is the electronic text of an email message or website an offer or an invitation to make an offer? Turning to the U.C.C. for guidance, "a contract for [the] sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties recogniz[ing] the existence of such a contract."[58]Article 2 continues, stating, "[u]nless otherwise unambiguously indicated by the language or circumstances … an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances."[59] The essential question is deciphering whether the seller or buyer made the offer.
{28}The court will likely distinguish a webpage as an invitation to make an offer, rather than an offer itself.[60] On any given webpage, the seller usually disclaims any guarantee that the goods offered on the site will be available at published prices. Thus, unless the seller makes it absolutely clear, the potential buyer's order will likely be viewed as "inviting acceptance [,] either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods."[61] The court may construe the website content as an offer, thus inviting the buyer to accept, if its language specifically calls for acceptance by a specified act (e.g., phone, fax, or e-mail) of the buyer.[62]
{29}Historically, Article 2 is viewed as applying only to tangible products, not intangibles like information.[63] The problem with current Article 2 is its limited scope. Article 2 § 102 specifically states that "[u]nless the context otherwise requires, [Article 2] applies to transaction[s] in goods."[64] Furthermore, goods are defined as "all things …which are moveable at the time of identification to the contract."[65] Thus, the need arose to revise Article 2 so that it addresses the requirements of the information age and the changing world of commerce. From the ashes, with laptop in hand, arose proposed U.C.C. Articles 2 and 2B.
c. Proposed U.C.C. Articles 2 and 2B
{30}Proposed Articles 2 and 2B are a direct response to the fear that the current Article 2 fails to provide a suitable body of law to protect online consumers and merchants.[66]The scope of newly proposed Article 2 is broader than the current Article 2. The general scope of proposed Article 2B states that, "[t]his Article applies to licenses of information and software contracts whether or not the information exists at the time of the contract …."[67]The drafters hoped that the practical effect of enacting proposed Article 2B would broaden the scope of proposed Article 2, since a number of previously excluded contracts, specifically electronic contracts, now fall within its purview.
{31}Proposed Article 2 was drafted more broadly with the hope that courts would recognize the validity of electronic contracts under Article 2's current scope.[68] By definition, electronic contracts are not made using pen and paper. Thus, courts may find that an electronic contract is not valid due to the lack of a signed writing.[69]Nevertheless, courts are willing to recognize facsimile transmissions and telegrams as valid signed writings.[70]
{32}The authors of proposed Articles 2 and 2B deleted the terms "writing" and "signed."[71]Instead, the term "writing" was replaced with "record," and "signed" was replaced with "authenticate."[72]The term "record" is defined as "information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form."[73]The practical effect is to include electronic transactions as "writings."[74]Moreover, the term "authenticate" is defined as ""a signature], or … a symbol [that is adopted] … in whole or part with the intent to identify the party…."[75]Again, the practical effect is to allow for any encryption process used by a contracting party to identify themselves or others in electronic contracts.[76]
{33}One of the major issues with electronic contracts is the validity because invalid documents may be denied legal effect. In response to this problem, Section 2B-114 provides that electronic records cannot be denied validity based solely on their electronic nature.[77]Historically, courts have denied electronic records validity because fraudulent records can be easily created.[78]To alleviate this problem, the drafters included specific evidentiary provisions called "attribution procedures" in Section 2B-1150 of proposed Article 2B.[79]
{34}An "attribution procedure" is "a procedure established by law or agreement or adopted by the parties" and is used to verify electronic records and messages, provided that the "procedure is commercially reasonable."[80]The drafters did not include a specific attribution procedure within Section 2B-1150. The provision, however, does state that it may include "any security devices that are reasonable under the circumstances."[81]Thus, if the parties use an pre-agreed attribution procedure that is deemed to be commercially reasonable, any disputes arising out of the transaction create a rebuttable presumption that the electronic message originated from the specified party.[82]
{35}Under Section 2B-1161, there are three circumstances when an electronic message is attributable to a party: (1) when a sender or their agent, either electronic or human, sends an electronic message to a receiver;[83](2) when the receiver detrimentally relies on an electronic message sent by a sender or her agent, either electronic or human;[84]and (3) when a third party fraudulently sends an electronic message to a receiver, but the message is attributed to the sender because the third party obtained access to the sender's attribution procedures as a result of the sender's failure to exercise due care.[85]Section 2B-1161 also provides that the burden of proof falls on the party claiming detrimental reliance on an unsent message.[86]The party's reliance must be reasonable to uphold the claim.[87] The party accused of sending the message must show that they used reasonable care in the transmission of the message.[88] However, it is unclear whether a party would succeed even if the burden of proof is met.
{36}The United Nations Commission on International Trade Law ("UNCITRAL") Model Law on Electronic Commerce was adopted on December 16, 1996.[89]The Model Law generally applies to "data messages as defined in paragraph (1) of Article 2 where the data message relates to international commerce."[90]The law seeks to provide "basic rules on the validity, attribution and effect of computer-based and other forms of electronic messaging in commerce."[91] The Model Law consists of two chapters. The first chapter contains rules of general application, while the second chapter contains a number of special rules for particular areas of commerce.[92] Most notably, its provisions essentially mirror those of proposed U.C.C. Articles 2 and 2B.
{37}The Model Law is a comprehensive document that addresses various aspects of electronic commerce, some of which apply in a conflict of laws analysis. Thus, given the brevity of this article, the following sections primarily address the relevant portions of the Model Law applicable to a choice of law analysis.
{38}Beginning with Article 2, the Model Law provides a list of definitions relevant to understanding its scope and applicability.[93]Articles 5 and 6 enable the legal recognition of data messages.[94]Essentially, electronic data messages produce the same legal effect as messages written in traditional format, such as on paper. Article 7 focuses on authentication, one of the foremost concerns of electronic contracting.[95] In the context of the traditional contract, the signature functions as a means of authentication. Since electronic contracts offer no room to sign, authentication of electronic messages proves problematic. Article 7 asserts that any "method used to identify [a] person" constitutes a signature.[96] The formation and validity of electronic contracts emerge as another predominant issue facing electronic contracts. Article 11 states that both, the offer and acceptance of the terms of a contract can be made via electronic messages.[97]
{39}Attribution is the process of attributing an electronic message to the sender. With respect to electronic contracts, the problem arises when A obtains access to B's e-mail account and then sends a message to C. Although A sent the message, the message is attributed to B. At first glance, one might think that this is merely bothersome. However, if A accesses B's account and proceeds to order $100,000 worth of Vir-All, the situation becomes more than just bothersome. In addressing this issue, Article 13 establishes criteria that provide guidance to a judicial body, either a court or an arbitration panel, in determining whether an electronic message is attributable to a particular party. [98]
{40}The location and timing of contract negotiation and consummation play a pivotal role in conflict of law analysis for contracts. The location where the contacting occurs provides the substantive law that governs the agreement; hence, the place of contracting determines the outcome. Since electronic contracts are often negotiated and executed in cyberspace, problems similar to determining personal jurisdiction on the Internet arise. In addressing this issue, Article 15 sets out a series of criteria for determining when and where an electronic message is sent and received.[99]
{41}With regard to the question of "when" a contract is negotiated and/or executed, Article 15 provides that an electronic message is deemed simultaneously dispatched and received if sent by means of an information system specified by the parties.[100]In cases where the parties do not specify an information system, a message is deemed received at the instant it is retrieved.[101]
{42}With regard to "where" an electronic contract is negotiated and/or executed, Article 15 states that a message is "deemed dispatched at the place where the originator has its place of business, and is deemed received at the place where the addressee has its place of business."[102]Article 15 also provides for cases where the dispatcher or receiver of the electronic message has more than one place of business or does not have a place of business.[103]In the event that either party has more than one place of business, for purposes of this section, the place of business is the one bearing the closest relationship to the transaction.[104]If a party does not have a place of business, then the party's habitual place of residence is substituted for the place of business.[105]
e. The Singapore Model: Electronic Transactions Act of 1998
{43}In response to the explosive growth of electronic commerce, Singapore enacted the Electronic Transactions Act of 1998 ("ETA").[106]
{44}The aim of the ETA was to create a legal framework for the regulation of electronic commerce in Singapore. In conceiving the ETA, the drafters sought to address four important concerns: (1) creation of an integrated global framework for electronic commerce; (2) avoidance of over-regulation; (3) flexibility and neutrality to facilitate change and maintain pace with a "fluid global environment"; and (4) clarity and predictability in the law.[107] It is worth noting that some of these provisions mirror those of UNCITRAL and proposed U.C.C. Articles 2 and 2B.
{45}The most pertinent goal of the ETA, at least with respect to this article, is the enactment of a commercial code specifically written to address electronic transactions. Part IV of the ETA deals specifically with Electronic Contracts and addresses issues of formation.[108]In addition, the ETA also initiated a "public key infrastructure" to assist in the use of digital signatures.[109] The public key infrastructure was designed to provide a means by which government agencies can electronically issue permits and licenses. Lastly, it provides immunity for network service providers, like America On-line and CompuServe, from criminal or civil liability for materials distributed by third parties.[110]
{46}Part IV, Section 11 of the ETA specifies that an offer and acceptance can be made via electronic message.[111] However, the central issue with electronic contracts is determining the exact moment of formation. In other words, when is an offer and an acceptance deemed offered and accepted? Section 15 provides that the message, whether it is an offer or acceptance, is sent at the "[moment] it enters an information system outside the control of the originator."[112] Essentially, this means the instant the message is sent.
{47}However, according to Section 15(2), the time of acceptance varies.[113]If the dispatcher, who is the offeror, designates a specific information system to which the message containing the offer will be sent, the offer is deemed received at the instant the message enters said information system.[114]If, however, the dispatcher does not specify an information system, the offer is deemed received at the instant the recipient ( i.e., the offeree) retrieves the message.[115]
{48}Another important consideration in electronic contracts is the location of the offeror and the offeree. Specifically, where is the offer sent from and where is the acceptance made? Section 15(4) states that, subject to a prior agreement to the contrary, the place of dispatching is the sender's place of business.[116]If, however, the sender or dispatcher has more than one place of business, then the situs for the transmission of the electronic message is the place that has the closest relationship with the underlying transaction.[117]If, on the other hand, the sender does not have a place of business, then the sender's usual place of residence is the situs for the transmission.[118]In the case of a corporation, the "usual place of residence" refers to the place of incorporation.[119]
{49}As the preceding sections demonstrate, the Internet is a vast and complicated area requiring regulation. The area of electronic contracts is one requiring special attention, given the number of persons with access to the Internet, and the billions of dollars spent on products and services purchased through the Internet. Several bodies have proposed numerous ways to deal with the issues raised by electronic contracting. These laws serve as excellent models upon which federal legislation regulating electronic contracts can be based.
III. SUBJECT MATTER JURISDICTION: A MATTER OF FEDERAL LAW.
{50}Federal legislation governing electronic commerce must be enacted. Enacting federal legislation eliminates the need for a choice of law analysis. However, the issue becomes whether Congress has the authority to pass such legislation, and, if so, from where it possesses such authority. Moreover, does this authority violate the Tenth Amendment? The other issue needing resolution, at least in the context of the Vir-All example, is whether transfers of electronic data qualify as goods in interstate commerce, and are thus subject to federal legislation.
A. Commerce Clause: Authority of Congress to Regulate Interstate Commerce
{51}The Commerce Clause provides that "Congress shall have the power to regulate commerce with foreign nations, and among the several states and with the Indian tribes."[120]Traditionally, Congress has broad power to regulate interstate commerce. In Maryland v. Wirtz,[121]Justice Douglas stated, in his dissent, that Congress may regulate "[a]ll activities affecting commerce."[122]However, with the advent of the Court's decision in U.S. v. Lopez,[123] many scholars felt that Congress' commerce power shrank.
{52}Many legal scholars believed that the Lopez decision sounded the death knell for Congress' ever-expanding commerce power.[124]In a sharply divided 5-4 decision, the Court struck down the Gun Free School Zone Act of 1990 ("GFSZA"),[125]stating that it exceeded Congress' commerce power under the Commerce Clause.[126]The GFSZA forbade "any individual to knowingly posses a firearm at a place that [he] knows … is a school zone."[127]The Court reasoned that the GFSZA was a criminal statute that did not in any way regulate economic activity, no matter how broadly defined.[128] However, the Lopez decision did not restrict the expansive view of Congress' commerce power wielded by nearly every Court since Wickard v. Filburn.[129]
{53}In reality, the Lopez decision carved out a very narrow exception to the historically expansive interpretation of Congress' commerce power. Lopez essentially held that Congress possessed the authority to regulate three broad categories of activity: channels of interstate commerce; instrumentalities, persons, or things in interstate commerce, even when purely intrastate in nature; and those activities having a "substantial" relation to interstate commerce.[130] The only real change that Lopez effectuated is that the regulated activity must have a "substantial" effect on interstate commerce.[131] Moreover, the statute in Lopez exceeded Congress' commerce power simply because it bore no relation to an economic activity.[132] Thus, even with the Lopez decision lurking in the shadows, the Court will likely uphold a federal statute regulating an economic activity that substantially affects interstate commerce.
{54}With this in mind, the question is whether electronic commerce falls within the definition of an economic activity having a substantial effect on interstate commerce. As the following section illustrates, it clearly does.
B. Defining Commerce: Tangible v. Intangible Goods
{55}One of the issues Congress must resolve in drafting this legislation is whether downloaded computer programs constitute interstate commerce. If commerce is defined as the flow of goods from point A to point B, then whether software sold on the Internet constitutes a "good" is a key question. The Department of Commerce has specifically stated that "software on a carrier medium exhibits characteristics of both concrete property and abstract knowledge."[133] Thus, it follows that data downloaded onto a medium (e.g., a hard-drive) fits within this definition of goods.
{56}Moreover, the number of Internet users and the number of webpages double every 100 days.[134] There are "thirteen million host computers in ninety countries linked by more than fifty thousand connected computer networks."[135] More than six-hundred fifty thousand websites are currently in existence.[136]At any given point in time, the Internet is used by more than 140 million people around the world. e-business or e-commerce will grow into a $600 billion industry by 2002.[137]
{57}Most notably, electronic commerce transcends all physical boundaries, including state and national borders. This is true even in cases where the product is sold and shipped to the same state. In the Vir-All example, when the customer initially logged onto the Internet, his connection was routed through several servers and networks located throughout the United States and, in some cases, the world. Thus, due to its nature and given the amount of money spent on products bought on the Internet, electronic commerce is clearly an economic activity having a substantial effect on interstate commerce.
{58}Therefore, there is no question that Congress has the authority to regulate electronic commerce on the Internet pursuant to its commerce power. However, the issue does arise as to whether this right infringes upon the rights reserved to the states under the Tenth Amendment.
C. Precluding State Regulation of Electronic Commerce
{59}The Tenth Amendment provides that, "[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the United States, are reserved to the States respectively, or to the people."[138]In 1997, Congress passed the Internet Tax Freedom Act that essentially placed a three-year moratorium on the ability of states to tax electronic commerce, with very limited exceptions.[139]Moreover, in American Library Association v. Pataki,[140]the court stated that the Internet is "analogous to a highway or railroad," and therefore, it is an instrument of interstate commerce, governed by the Commerce Clause.[141] Yet, it is not certain that when the three-year moratorium is lifted, whethersubsequent federal legislation will take place.
{60}The Dormant Commerce Clause provides that, where there is no uniform system of regulation required by the federal government, the states are free to regulate commerce.[142] Subject to some exceptions and nuances, the state regulation must satisfy a two-part test to avoid violating the Commerce Clause. First, the state regulation must be non-discriminatory. In essence, the state regulation must not discriminate against interstate commerce in favor of local interests. Second, the state law must not unduly burden interstate commerce. Courts are required to balance the state's interest in regulating the activity against the burden on interstate commerce. Additionally, there must not be less intrusive means of regulation available to the state.[143]
{61}A number of state legislators have attempted to regulate content on the Internet, and some are considering regulating electronic commerce on the Internet. New York's Internet Decency Law[144]is one such example. A federal district court struck down the statute in American Library Association v. Pataki[145] because it was found to violate the Dormant Commerce Clause. The court stated that the New York statute concerned interstate commerce given the nature of the Internet, despite the fact that it was aimed at regulating the content of information entering the state.[146]The court reasoned that the Internet is an area requiring national regulation, since attempts at regulation by the states would result in inconsistent laws, thereby subjecting users of the Internet to conflicting obligations.[147]Based upon this reasoning alone, states may be preempted from electronic commerce and Internet regulation.
D. Addressing the Choice of Law Issue
{62}As the following sections illustrate, the problem with choice of law in electronic commerce cases is that several states often have competing interests in the application of their own substantive law. This presents a problem when claims are either filed in or removed to federal court under diversity jurisdiction. The constitutional grant of jurisdiction to federal courts based on diversity of citizenship extends to "[c]ontroversies … between citizens of different states … and between a state, or the citizens thereof, and foreign states, citizens or subjects."[148]In diversity actions, federal courts are forced to apply the "substantive" laws of the state in which they sit pursuant to the Erie doctrine.[149]Moreover, the U.S. Supreme Court, in Klaxon Co. v. Stentor Electric Manufacturing Co.,[150]specifically held that choice of law is considered "substantive" rather than "procedural."[151] Therefore, where choice of law is an issue, diversity cases in federal court face the same uncertain outcome as cases filed in state courts because different state laws produce varying outcomes.
{63}The simplest way to resolve this matter is through a federal statute. A federal statute would provide uniform application to, and results in, the same cause of action, regardless of where the claim is filed. Federal law would preempt all state laws, providing fair and consistent results.
{64}This federal question jurisdiction is derived from Article III of the U.S. Constitution.[152]Article III grants jurisdiction over "[c]ases … arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their authority."[153]In turn, pursuant to 28 U.S.C. § 1331, Congress states that "[federal] district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws or treaties of the United States."[154] Thus, if Congress passes a law regulating electronic commerce, federal courts retain original subject matter jurisdiction to hear all claims challenging the federal laws. Any claims citing to the federal laws, however, would still be governed by laws in state court. Again, a fair and uniform result is achieved. The courts would not be bound to apply the substantive choice of law rules of any state.
IV. PERSONAL JURSIDICTION: THE PROBLEM OF PRESENCE.
{65}With respect to personal jurisdiction, electronic contracting raises the problem of presence. However, jurisdictional disputes do not arise in every Internet-related lawsuit. There are cases where the defendant has established sufficient minimum contacts with the forum. The problem of jurisdiction only arises where the defendant is not physically present in the forum, or when there is no continuing relationship with the forum. Referring back to the Vir-All example, Scott was asked to defend a suit in a state in which he was neither present, nor had any contact. The Vir-All example illustrates how the advent of electronic commerce allows parties to negotiate, sign, and consummate a contract over the Internet without having any contact with a forum state.
{66}Nearly all court opinions on personal jurisdiction first discuss how the court obtains subject matter jurisdiction, and then engage in a due process analysis by applying the minimum contacts test and all relevant fairness factors.[155]In keeping with this format, this article discussed the relevant subject matter jurisdiction analysis in the preceding section. Beginning with the historical development of personal jurisdiction from Pennoyer v. Neff[156] to Burnham v. Superior Court of California,[157] subsequent sections of this article discuss issues surrounding personal jurisdiction.
A. The Evolution of Personal Jurisdiction
{67}Personal jurisdiction is the power of a court to adjudicate a claim against a defendant and to render a judgment enforceable against the defendant or any of his assets.[158]Personal jurisdiction traces its roots to the landmark decision in Pennoyer v. Neff,[159] dating back to 1877. Since Pennoyer, courts have struggled to define the precise constitutional limitations finding personal jurisdiction over defendants. Pennoyer made it clear that presence within a forum confers in-personam jurisdiction over a defendant, while the presence of property confers in-rem jurisdiction.[160]Writing for the majority, Justice Field reasoned that personal jurisdiction over a defendant can only be found where the defendant was present or voluntarily appeared within the forum's borders.[161] Needless to say, the technological advancements over the past 120 years have rendered Pennoyer's definition of "presence" outdated and obsolete.
{68}In 1877, a vast majority of contracts were both negotiated and consummated in face-to-face dealings. With the advent of the telephone and the fax machine, however, the standard course of dealing changed. This created the need for an expansive view of the permissible reach of the Court's jurisdictional boundaries. The Court's response to the changing business environment was International Shoe v. Washington.[162]International Shoe expanded the reach of a court because it conferred personal jurisdiction over defendants located outside the forum's territorial jurisdiction.[163]
{69}Justice Stone, writing for the majority, held that the defendant shoe company was subject to personal jurisdiction in the State of Washington, even though it was based outside of thatstate's borders.[164] The Court's reasoning was based in part on the fact that the defendant sent sales associates to Washington. The salesman then proceeded to conduct business in Washington, thereby establishing contact with the state.[165]This became known as the "minimum contacts test."[166]However, this significant expansion of the Court's jurisdictional reach under International Shoe's minimum contacts test raised the question of due process.[167] Did this new expansive reach violate the defendant's due process rights? The Court concluded that the defendant's due process rights would not be violated if the defendant's minimum contacts with the forum state were "such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice."[168]In 1957, the Court, in McGee v. International Life Insurance Co.,[169] further expanded the minimum contacts test. In McGee, the Court found jurisdiction over a defendant insurance company with only one policyholder in the forum state.[170]The McGee decision is viewed by many as bordering on the fringes of unconstitutionality.[171]
{70}Many lower courts are split on the issue of whether the defendant in McGee had sufficient contacts with the forum to permit a finding of jurisdiction.[172]Due to badly fractured lower court interpretations of McGee, personal jurisdiction was categorized into general and specific jurisdiction.[173] What followed, some twenty-three years later, was one of the most influential decisions on personal jurisdiction.
{71}In 1980, the Court pronounced the landmark decision of World-Wide Volkswagen Corp. v. Woodson.[174]World-Wide Volkswagon resolved some of the complexities of balancing the factors in the "fair play and substantial justice" prong of the International Shoe test.[175]In World- Wide Volkswagen, the Robinsons purchased a car in New York.[176]As they passed through Oklahoma on their way to Arizona, they were injured in a car accident allegedly caused by a defect with their new car.[177]
{72}The Robinsons filed suit in Creek County, Oklahoma, naming the dealership, importer, distributor, and manufacturer - none of whom were based in Oklahoma - as defendants.[178]
{73}World-Wide, the regional distributor, and Seaway, the dealer, were both based in New York and consequently had no connection or contact with Oklahoma.[179] Both World-Wide and Seaway moved to dismiss for lack of personal jurisdiction, but the Oklahoma court denied their motions. Upon review, the United States Supreme Court found that even though New York-based Seaway could have anticipated that one of its cars would end up in Oklahoma, it would be unfair to subject it to jurisdiction there because it could not have foreseen being haled into Oklahoma to defend a lawsuit.[180]
{74}The manufacturer, on the other hand, had dealerships in Oklahoma that sold Volkswagens.[181] The Court reasoned that the manufacturer placed a large number of automobiles into the stream of commerce whereby some of these automobiles would enter the state of Oklahoma. Thus, the manufacturer was subject to personal jurisdiction in Oklahoma.[182]This expansive view of personal jurisdiction in World-Wide Volkswagen evidenced the Supreme Court's acknowledgment of the technological advancements made in the areas of transportation and communication.[183]
{75}The Supreme Court, in World-Wide Volkswagen, articulated a two-prong due process test for determining personal jurisdiction.[184] The first prong, often described as the "minimum contacts test," focuses on two factors: (1) the non-resident defendant's connection or affiliation with the forum state; and (2) the nexus between the defendant's connection to the forum and the litigation.[185]The second prong looked at a series of relevant factors in determining whether an assertion of jurisdiction comports with notions of "fair play and substantial justice."[186]
{76}As applied, there are several factors employed by the Court to implement the minimum contacts test. These factors include: (1) whether "the defendant has 'purposefully directed' his activities at residents of the forum" and [whether] "the litigation results from alleged injuries that 'arise out of or relate to' those activities;"[187](2) whether the defendant "purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws;"[188] and (3) whether the "defendant's conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there."[189]The Court considers each of these factors separately, giving courts some leeway in determining whether a defendant's contacts with the forum state satisfy the minimum contacts test.[190]
{77}The notions of "fairness and substantial justice" from International Shoe[191]were more specifically addressed forty years later in Burger King v. Rudzewicz.[192]In Burger King, the Court expanded on the factors it first considered in International Shoe to determine whether a finding of personal jurisdiction offends notions of "fairness and substantial justice."[193]
{78}In Burger King, the Court specifically held that, if a defendant purposely directs his activities toward the forum, then it is "presumptively not unreasonable to require the defendant to submit to the burdens of litigation in that forum .…"[194]The Court further stated that this presumption might either be enhanced or overcome by an evaluation of other factors in determining whether an assertion of jurisdiction by the forum comports with "notions of fair play and substantial justice."[195] The factors that the Court looked to in making this determination include: (1) the burden on the defendant; (2) the adjudicative interest of the forum state; (3) the plaintiff's interest in obtaining convenient and effective relief; (4) the systemic interest of the national judicial system in obtaining the most efficient resolution of the litigation; and (5) the systemic interest in furthering substantive social policies.[196]In an attempt to distinguish between a fair and unfair finding of jurisdiction, the Burger King Court noted that, "a substantial amount of business is transacted solely by mail and wire communications across state lines, thus obviating the need for physical presence within a state…."[197]
{79}Two years after the Burger King decision, the Court handed down its decision in Asahi Metal Industry Co. v. Superior Court,[198] which is the leading case to date on the stream of commerce doctrine. In a split, four-justice plurality, the Asahi Court narrowly refused to assert jurisdiction over a Japanese company whose defective tire valve was swept into the stream of commerce while making its way to California.[199]The Asahi Court relied heavily on Burger King's factors; yet, reached a different result.[200]The Court held that the mere foreseeability that the stream of commerce might carry a product into the forum was insufficient to confer jurisdiction over the defendant without additional conduct on the part of the defendant.[201]The Court illustrated several types of "additional conduct of the defendant" that might be suitable to allow a court to assert personal jurisdiction, such as specifically designing, advertising, or marketing a product with specific reference to the forum state.[202]
{80}By 1984, increasing advancements in technology resulted in splintered lower court decisions on the issue of personal jurisdiction. In an attempt to clarify the issue, the Supreme Court in Helicopteros Nacionales De Colombia v. Hall[203]reiterated the distinction between general and specific personal jurisdiction.[204]The Helicopteros Court held that "general personal jurisdiction" equates to "continuous and systematic contacts" with the forum, whether or not the contacts relate to the suit.[205]Specific personal jurisdiction, on the other hand, may arise from even a few contacts with the forum related to the suit.[206]
{81}In one of the most tenuous personal jurisdiction cases in recent history, the Court, in Burnham v. Superior Court of California,[207] affirmed the exercise of personal jurisdiction over a defendant based upon his transitory presence in the forum. In Burnham, Dennis and Francie Burnham, along with their two children, were residents of New Jersey. When Mrs. Burnham took the children and moved to California, Mr. Burnham filed for divorce in New Jersey, but failed to serve Mrs. Burnham with service of process. Shortly thereafter, Mrs. Burnham filed for divorce in California.[208]
{82}While on a business trip to California, Mr. Burnham decided to visit his children at his wife's home. While at her home, Mr. Burnham was personally served with a summons. In a special appearance, Mr. Burnham moved to quash the service of process for lack of personal jurisdiction. The Superior Court of California denied the motion despite the fact that the petitioner's only contacts with California were occasional business trips and visits with his children.[209]Upon review, the California Court of Appeals affirmed the trial court's ruling.[210]The Supreme Court of California declined to review the case.[211] The United States Supreme Court subsequently granted certiorari.[212]
{83}In an unanimous decision,the U.S. Supreme Court held that the trial court's assertion of personal jurisdiction over the petitioner did not violate the Due Process Clause.[213]In addressing the constitutionality of "transient,"[214]or tag jurisdiction, the Court recounted that courts have historically asserted general jurisdiction over defendants served within the forum.[215]Despite the Court's unanimous decision to uphold the California trial court's ruling, only four justices agreed that personal service within the forum satisfied due process requirements.[216]Four justices stated that each case required an analysis under the minimum contacts test, while one justice agreed with the assertion of jurisdiction, but disagreed with the breadth of the opinion.[217] After the dust settled, it remained unclear whether tag jurisdiction based upon personal service within the forum was a constitutionally valid basis for the assertion of personal jurisdiction. To date, the U.S. Supreme Court has not issued a subsequent ruling on this matter.
B. Other Bases of Jurisdiction
{84}There are some instances where the minimum contacts test is not satisfied. For instance, in the Vir-All example, assume that the New York court's ruling that it did not have jurisdiction over Scott was due to the fact that Scott's contacts with New York were not sufficient to satisfy the minimum contacts test. Pursuant to Section 402 of the Third Restatement first subsection, the court could have found jurisdiction through the application of the effects principle or a number of other bases of jurisdiction, discussed in detail in subsequent sections of this article.[218]
{85}The territoriality principle is by far the most common basis for the exercise of jurisdiction to prescribe, and is generally free from controversy.[219]
{86}The principle allows a state to proscribe the conduct of persons (e.g., Internet service providers) located within the state's territorial boundaries. Moreover, under international law, states can be held responsible for allowing their territory to be used for unlawful activities directed against other states.[220]
{87}However, the territoriality principle does not allow a state to apply its national laws extraterritorially. For example, Syria or any Islamic country may legally ban the use of any products either made or originating from Israel. However, this principle does not allow Syria to ban all Israeli products from entering Jordan because this is contrary to international law. The case of American Library Association v. Pataki,[221]provides another illustration of the limitations of the territoriality principle. Note, however, that American Library deals with a dispute between a state and nation, as opposed to two sovereign nations.
{88}In Pataki, the Federal District Court for the Southern District of New York overturned a New York state law aimed at protecting children from receiving obscene and indecent material over the Internet.[222]The statute, in its practical effect, applied to Internet users located both in and out of New York state.[223]In the opinion, the court stated that, "Internet users have no way to determine the characteristics of their audience that are salient under the New York Act--age and geographic location."[224]Pataki made it clear that the territoriality principle is not an adequate basis for jurisdiction over Internet transactions.
{89}The nationality principle is the right of a state to regulate the conduct of its citizens or nationals, regardless of whether they are within the state's territory.[225]
{90}For example, the sexual exploitation of children is illegal in the U.S. Any adult who engages in sexual intercourse with a child can be punished by the U.S., even if the act is performed within the jurisdictional boundary of a state where it is legal or tolerated.[226]It is important to note that both the nationality and territoriality principles are applicable to both natural persons and legal entities (e.g. corporations).[227] Although it has yet to be applied to the Internet, it is doubtful that the nationality principle provides an adequate basis for jurisdiction on the Internet.
{91}The effects principle is invoked when a person or entity commits an act in one state that causes injury in another state.[228]In such cases, jurisdiction is not grounded in the act or omission, but rather in the injurious effects the act has on the forum territory.[229]The effects principle is the most controversial principle.[230]At the heart of the controversy is the situation where the act is legal in the state in which it is performed.[231]The effects principle has general application in US antitrust laws but has provoked considerable controversy due to the US' attempts to regulate the activities of foreign states.[232]Despite worldwide criticism, the effects principle has become increasingly accepted as a basis for jurisdiction.[233]
{92}The U.S. Supreme Court addressed the effects principle in Calder v. Jones.[234]In Calder, the Court upheld a California court's assertion of jurisdiction over two defendants from Florida.[235]Although the defendants' activities were performed in Florida, the Supreme Court found that they were deliberately targeted and calculated to cause injury to the plaintiff in California.[236]In doing so, the Supreme Court expressly approved the "forum effects" test of the Second Restatement of Conflicts of Laws.[237]The defendants, the author, and the editor of a libelous article had no material personal contact with California.[238]Accordingly, the Court had no basis to find that either defendant "purposefully availed" themselves of the benefits and protections of California law.[239]Notwithstanding, the Court held that it was reasonably foreseeable that the defendant's conduct in Florida would cause harm in California, and that they would be hailed into California to defend a suit.[240]The first cyberspace case to invoke the effects principle was United States v. Thomas.[241]In Thomas, the defendants were operators of a computer bulletin board system based out of their home in California.[242]They posted sexually explicit materials onto the bulletin board, including scenes depicting bestiality, sadomasochistic abuse, and urination.[243]Access to the bulletin board was limited to members required to pay a membership fee and to submit biographical information including age, address, and telephone number.[244] As long as a member had maintained access to the Internet, they could access the bulletin board and download pictures from anywhere in the world. After becoming a member, an undercover agent gained access to the bulletin board and downloaded some of the explicit material available to a computer in Memphis, Tennessee.[245]The defendants were subsequently charged with transportation of the sexually illicit material, and subsequently indicted in the federal district court of Tennessee.[246]The defendants moved to dismiss the action for improper venue, claiming that the illegal act occurred in California, not Tennessee.[247]
{93}The Sixth Circuit held that "the effects of the defendants' criminal conduct reached the Western District of Tennessee, and that district was suitable for accurate fact-finding."[248] As such, the court found that venue was proper. Incidentally, within a month of the sentencing in Tennessee, Mr. Thomas was also indicted in federal district court in Utah for similar crimes. Thomas moved to dismiss the charges in Utah on the grounds of collateral estoppel and double jeopardy, due to his conviction in Tennessee, but was denied.[249]
{94}Critics of the Thomas decision are quick to point out that the case sets bad precedent. At first glance, the Thomas decision seems to exacerbate the fear that, on any given day, an Internet-user can be hauled into court in Angola. However, it should be noted that, the defendants in Thomas knew the jurisdiction in which their files were most likely to be accessed because of the application that members were required to complete before bulletin board access was granted. Therefore, the assertion of personal jurisdiction in Thomas is not as tenuous as it may first appear.
{95}At first blush, it appears that the court could find jurisdiction over Scott in the Vir-All example using the reasoning of Thomas. However, Scott's situation is different. Recall that in Scott's case, he neither had knowledge, nor direct input in processing the orders from contracts. The whole process in the Vir-All example was automated, requiring no human intervention. The facts of the Thomas decision did not mention whether the defendants had any direct input in processing the membership applications.[250] Therefore, the Thomas decision cannot be applied to Scott.
4. Universality Principle and the Protective Principle
{96}The "universality principle" allows a state to assert jurisdiction over a defendant extraterritorially in cases involving crimes that are universally condemned, such as terrorism.[251]The "protective principle" permits a court to assert jurisdiction over defendants who commit crimes that threaten the security of a nation or state.[252]Both the universality and protective principles are seldom used in civil litigation.[253] Thus, their application to electronic contracts is highly unlikely.
C. Personal Jurisdiction and the Internet
{97}The United States Supreme Court has not yet ruled on the issue of personal jurisdiction with respect to the Internet. However, with relatively few exceptions, the circuit courts have generally held that a telephone call directed into the forum satisfies the minimum contacts test.[254]
1. Judicial Opinions on Internet Jurisdiction
{98}In 1995, CompuServe again filed suit against a subscriber from Texas, in federal district court in Ohio.[255]In Patterson, the court granted the defendant subscriber's motion to dismiss for lack of personal jurisdiction.[256] The defendant in Patterson was a Texas resident who was never physically present in Ohio, but routed through Ohio via modem. Patterson sold an on-line computer program through CompuServe that customers could purchase and download off the Internet. As a result of the defendant's on-line business, CompuServe asserted that Patterson was amenable to process in Ohio. CompuServe reasoned that since Patterson was a party to the subscriber agreement, all of the products he sold were essentially sold through Ohio, since CompuServe was based in Ohio.[257]
{99}The district court held that there was no adequate basis for specific personal jurisdiction.[258]The trial court reasoned that since the defendant was not physically present in Ohio, the fact that the defendant sold products via a server based in Ohio was of little consequence, since his contacts with Ohio customers were very limited.[259]The Sixth Circuit reversed, holding that the defendant's contacts with Ohio were sufficient for the court to assert jurisdiction.[260]The circuit court stated that the defendant's use of CompuServe's services in Ohio constituted sufficient contacts for a finding of personal jurisdiction, despite a lack of physical presence in Ohio.[261]
{100}This decision flies squarely in the face of the Supreme Court's ruling in Asahi. Recall, that the Court in Asahi held that the mere foreseeability, without "additional conduct," that the stream of commerce might carry a product into the forum, was insufficient to confer jurisdiction over a defendant.[262] Arguably, Patterson's products came into Ohio, not through any purposeful actions on his part, but rather, by reason of the stream of commerce. Thus, according to the Asahi decision, the court of appeals incorrectly found that Patterson's contacts were sufficient to confer jurisdiction upon the court. Moreover, the finding of the court in Pres-Kap, Inc. v. System One, Direct Access, Inc.[263] supports this conclusion.
{101}In Pres-Kap, the defendant contracted to provide a network information service for airline and travel reservations for the plaintiff.[264]Both the defendant and the defendant's server computer providing the data service were physically located in Florida.[265] The plaintiff signed and negotiated the contract with the defendant in New York, where the defendant kept a local office. The plaintiff had no knowledge of the whereabouts of the defendant's server computer. At some point during their relationship, a dispute arose over the performance of the network. System One filed a complaint in Florida, but Pres-Kap challenged the court's jurisdiction.[266]The court of appeals held that personal jurisdiction over Pres-Kap was improper, since computer contact, with nothing else, is an insufficient basis to establish jurisdiction.[267]The court reasoned that the ambiguity as to where the computer was actually present made personal jurisdiction unfair because it raised the prospect of subjecting private citizens to litigation in distant fora.[268]
{102}Thus, under Asahi, it follows that if a defendant advertises, and then sells a product over the Internet to a customer in New York, the court could not constitutionally find jurisdiction over said defendant. However, the Court in Asahi also stated that jurisdiction is proper in cases where the defendant specifically designs, advertises, or markets his product with specific reference to the forum state.[269]
2. Non-Judicial Opinions on Internet Jurisdiction
{103}As the preceding
cases indicate, the courts have reached widely varying results
despite similarities in the nature of the lawsuits. Uncertainty
about the jurisdictional reach of territorially-defined courts
over the trans-territorial Internet is slowly becoming a headache
both for scholars and practitioners. Most
legal scholars consider the Internet to be a new kind of place,
a place called "cyberspace."[270]Cyberspace is
a place where no territorial court can properly exercise personal
jurisdiction over any cyber-defendant until the law either adapts
or develops to address this new territory.[271]
V. TRADITIONAL CONFLICT OF LAWS ANALYSIS IN CONTRACTS.
{104}The modern conflicts of law or choice of law era did not begin until 1963.[272]In 1963, a compilation of the writings by the late Professor Brainerd Currie's was published.[273]Within the same year, the landmark decision of Babcock v. Jackson[274] was handed down by Judge Fuld of the New York Court of Appeals. Since then, conflict of laws doctrines have developed over time as courts have been confronted with facts requiring them to consider the application of another jurisdiction's laws. For instance, assume that there are two parties: party A located in New York and party B located in California. The two parties enter into a contract in Virginia. Some time later, A files suit against B for breach of contract in New York. The New York court may find that the proper law to apply is that of Virginia, or in the alternative, that of California. In such cases, the court may also invoke the laws of more than one jurisdiction.
{105}There are several subsets of the doctrine more generally known as conflict of laws. Jurisdictional issues are one such subset. However, the determination of which substantive laws to apply in resolving the issue is a wholly separate subset. The question of jurisdiction involves the determination of whether a court can exercise power over a party or the subject matter of the case. Substantive law questions, on the other hand, concern the law that a court will apply to the case, and arise only after the court has properly determined that it has jurisdiction over the parties and the issues before it.[275]
{106}Upon a proper finding of jurisdiction, a court then determines which law to apply substantively to the case by utilizing choice of law rules. This process is procedural in character and is traditionally made without regard to the substance of the laws that are in conflict. The court's conflict of laws or choice of law determination is a critical factor, as it is outcome determinative. Looking back to the earlier example, if the New York court applies the substantive law of Virginia, it may reach a different conclusion than if it applied the substantive law of California. Thus, when contractual disputes arise, courts are free to apply any number of rules.[276] Some of these doctrines are described in the succeeding sections of this article.
A. Restatement (First) Conflict of Laws
{107}Historically, the Restatement (First) Conflict of Laws (First Restatement)[277] was the primary reference for choice of law decisions in the United States. The First Restatement focused on the geographic location of the place where the contract was formed.[278]In the landmark case of Milliken v. Pratt,[279] the court applied the First Restatement's doctrine of law to the place of contracting. In Milliken, the defendants executed and performed the contract in question in Portland, Maine. The plaintiffs were residents of Massachusetts; whereas, the defendants were residents of Maine. The defendants sued for payment in Massachusetts on a guarantee signed and executed by the defendant in Maine. The court held that the law of the place of contracting applied to resolve the case, provided that the law did not offend the public policy of the forum.[280]
{108}The rationale behind the First Restatement's Section 332 is considered in the following excerpt from Justice Story's Commentaries:
Generally speaking, the validity of a contract is to be decided by the law of the place, where it is made. If valid there, it is by the general law of nations, jure gentium, held valid everywhere, by the tacit or implied consent of the parties. The rule is founded not merely in the convenience, but in the necessities of nations; for otherwise it would be impracticable for them to carry on an extensive intercourse and commerce with each other.[281]
{109}Under this rule, the substantive law of the place of contracting determines the validity and construction of a contract.[282]More specifically, the place of contracting is where "the principal event necessary to make a contract occurs."[283] In most cases, the places of contracting and performance are the same. However, in some cases, the court's characterization of the issue as one of validity or performance of the contract becomes crucial in the choice of law process.
{110}The First Restatement approach remained largely unchanged until 1945, when the Indiana Supreme Court adopted the "significant contacts" test in W. H. Barber Co. v. Hughes.[284]Then, in 1954, the New York Court of Appeals in Auten v. Auten,[285] embraced the "center of gravity" approach. Though similar to the significant contacts test, the center of gravity approach emphasizes the policy considerations of conflicting laws. Nonetheless, it was not until 1963, that the choice of law revolution took flight with Babcock v. Jackson.[286]In the years following the Babcock decision, courts have become increasingly reluctant to apply the First Restatement when looking at choice of law issues.[287]
B. Restatement (Second) Conflict of Laws
{111}Following the erosion of the First Restatement's "place of contracting" approach, lower courts were badly splintered with regard to a uniform approach to choice of law.[288]A significant number of lower courts have embraced the "most significant relationship" analysis under the Restatement (Second) Conflict of Laws.[289] Under this approach, where a choice of law provision is absent from a contract, the court has to determine whether to apply the substantive laws of one state over another in resolving the issues presented before it. The following are factors that courts look to in making this determination: (1) the place of contracting; (2) the place where the contract was negotiated; (3) the place of performance; (4) the location of the subject matter of the contract; and (5) the domicile, residence, nationality, place of incorporation or place of business of the parties.[290]
{112}The Lilienthal v. Kaufman[291]court specifically rejected the Second Restatement's place of contracting approach in favor of one form of the Second Restatement's "interest analysis" approach.[292]The Lilienthal case was based on a dispute over two promissory notes that the defendant signed in favor of the plaintiffs.[293] Subsequent to signing the notes, the defendant was declared a spendthrift and placed under guardianship by an Oregon court. The guardian then declared the defendant's entire obligations void. The plaintiff's contention was that the notes were executed and delivered in California, and thus should be governed by California law, which incidentally did not recognize the defendant's spendthrift status.[294]
{113}The Supreme Court of Oregon held that the substantive law of Oregon would be applied in the case, and accordingly, dismissed the plaintiff's claims.[295]The court also noted that the interests of neither state were more important than the other since both states had a significant interest in the transaction.[296]Despite this mutual interest in the underlying transaction, the court noted that the public policy of Oregon necessitated the application of Oregon law in the case.[297]
{114}Closely related to the Second Restatement's most significant relationship test is the "center of gravity" test.[298] It is the oldest of the contemporary choice of law doctrines. In applying the center of gravity test, the court first looks at all of the significant factors that might logically influence the decision of which law to apply.[299]The court then applies the substantive law of the state with the most significant connection to the transaction and/or to the parties in the case.[300] Ironically, the center of gravity test's greatest asset is ironically also its biggest weakness. Consequently, proponents of the center of gravity test contend that its flexibility is its greatest asset, while critics view this as its most notable weakness. For many years, the center of gravity approach was almost exclusively applied by the New York Court of Appeals. However, New York courts no longer follow this approach.
{115}In the 1950's, Professor Brainerd Currie of Duke University, introduced a new choice of law doctrine that became known as the "governmental interest" analysis, or simply "interest" analysis.[301]The goal of Professor Currie's interest analysis doctrine was to ensure that the law, as applied by the forum, serves the purposes for which that law was created.[302] In applying the interest analysis approach, courts follow the series of steps illustrated in the following example.
{116}Scott, a resident of California, and Kris, a resident of New York, enter into a contract in London. A dispute arises and Kris sues Scott over the contract in New York. The court first identifies the corresponding law in each state that addresses the issue in the case. The court then evaluates the policy considerations underlying each of the laws. Finally, the court examines each interested jurisdiction's relationship to the parties as well as issues in the case, and determines whether or not the application of a particular state's law is consistent with the policy considerations underlying each law. Once the court has made a determination, the choice of law analysis that follows is routine. However, if the court finds that the application of either law does not serve the underlying policy behind each of the laws, the forum applies its own substantive law as a matter of convenience. This raises the issue of a false conflict vis a vis a true conflict.
{117}One of the greatest virtues of interest analysis is its ability to reveal false conflicts. A false conflict arises where only one state has an interest in having its substantive law apply to a case. The 1892 Alabama Supreme Court's decision in Alabama Great Southern Railroad Co. v. Carroll[303] provides an excellent illustration of this concept. In Carroll, the plaintiff was a citizen of Alabama and an employee of Great Southern, which also happened to be incorporated in Alabama.[304]Additionally, the negligent conduct that became the basis of the suit also occurred in Alabama.[305]Carroll alleged that a fellow employee negligently failed to properly inspect a train that contained a defective link between two cars, while the train was in Alabama.[306] However, Carroll was not injured until the train reached Mississippi.
{118}At the time of the suit, Mississippi followed the common law rule that an employer could not be held liable for injuries to a servant that were caused by the negligent act of a fellow servant.[307]Alabama, on the other hand, recognized employers' liability for the acts of its employees acting within the scope of employment.[308]The negligent act occurred in Alabama, and both the employees and the defendant corporation were domiciled in Alabama. Nonetheless, the Supreme Court of Alabama mistakenly chose to apply the substantive law of Mississippi, reasoning that the cause of action arose in Mississippi, rather than Alabama.[309]
{119}Although a case may have a territorial connection to two or more states whose laws seem to be in conflict with one another, there is really no real conflict.[310] For this reason, the dispute is termed a false conflict. In the Carroll case, Mississippi had no interest in having its own law applied; thus, what appeared to be a conflict under the traditional approach was, in fact, a false conflict.
{120}Unfortunately, not every conflict of laws situation turns out to be a false conflict. True conflicts exist where two or more states have an interest in having their substantive law applied. When faced with a true conflict, a court can choose to proceed in a number of ways: (1) to follow Professor Currie's view and apply the forum's law;[311](2) to determine whether "a more moderate and restrained interpretation" of the forum law reveals that its application does not accord with the purposes underlying it;[312](3) to ly the law of the state with the most significant interests, in other words the state most affected by non-application of its substantive law;[313] or (4) to ly a myriad of other choice of law doctrines.[314]
{121}One of the strengths of the interest analysis doctrine is its sensitivity to the substantive laws of non-forum states. Conversely, one of the historical problems with interest analysis is its failure to resolve true conflicts. Thus, the question remains, "what to do when the purposes behind all of the substantive laws being considered by the court are served by its application?" It has been suggested that there is no satisfactory answer to this question. Moreover, interest analysis, at least in its purest form, heavily favors the application of forum law.[315]
{122}In 1966, Professor Robert
Leflar published a law review article in which he endeavored to
summarize all of the factors that influenced courts in their choice
of law analyses.
[316] In his article, Leflar proposed the
following factors: (1) predictability of outcome; (2) maintenance
of order; (3) administrative burden on the court; (4) advancement
of the forum's interests; and (5) application of the best rule
of law.[317] Although Leflar's factors are hailed as
extremely flexible, unfortunately, the theory tends to favor application
of the forum law.
b. Contractual Choice of law Clauses
{123}Under the First Restatement, the traditional view of choice of law clauses in contracts was that they were presumptively unenforceable.